November 4, 2019

Better and Better

Current Market Outlook

It’s not a wild, rampaging bull market, but there’s no question the evidence has improved during the past couple of weeks—earnings season has offered more good than bad, with a decent number of positive reactions and breakouts, and for the first time in months, we’re seeing some follow-on buying (strength leading to more strength), which is typical of what you see in a sustained uptrend. There are still hurdles to overcome (most indexes are still testing the top of multi-month ranges), and short-term, investors are a touch complacent, so we wouldn’t be shocked to see some wiggles or further crosscurrents. But with more stocks acting well and with the trends of the major indexes pointed up, we think extending your line makes sense. We’re nudging our Market Monitor up to a level 7 on tonight’s issue.

This week’s list is chock-full of recent earnings winners, including many that appear to be early in new uptrends. Our Top Pick is Qorvo (QRVO), a well-traded chip maker that’s just staged a wild earnings gap. Start small and preferably on weakness.

Agnico Eagle Mines (AEM)

agnicoeagle.com

Why the Strength

Gold stocks had a great summer and have now been base-building for the past couple of months. If the group gets going again, we think Agnico Eagle Mines is one the best positioned, with some company-specific positives to go along with the benefit from higher gold prices. Really, it’s a matter of perfect timing—Agnico embarked on a massive CapEx wave in 2017 and especially 2018 (basically doubling spending over a couple of years) to advance some mines toward commercial stage, and now it’s beginning to reap the benefit of that, with one new mine coming on-line in May and another just a couple of months ago. They won’t be game changers, but Agnico’s production has been creeping higher and should grow another 10% next year, with further smaller gains following that. Just as important, CapEx is tapering off, which means free cash flow and earnings (which have leapt strongly each of the past two quarters) are beginning to surge and the big rally in gold prices (Agnico’s average sales price came in at $1,480 per ounce in Q3, up 23% from a year ago) is supercharging that. Indeed, analysts see the firm’s earnings nearly doubling next year, and management is also returning capital to shareholders with a 40% hike to its small dividend (yield now around 1.1%). Obviously, a drop in gold prices will put the kibosh on this story, but at this point the odds favor higher prices given the trends and some fundamentals. As far as gold stocks go, we like Agnico’s solid, de-risked growth story.

Technical Analysis

Like all of its peers, AEM changed character at the start of June and embarked on a big (40 to 64) and persistent (up 13 weeks in a row) run through August. The two-month correction after that was reasonable, and now AEM is acting better, enjoying a nice-volume pop after earnings and rallying back to within a few points of its high. If you’re game, you can start a position here and add to it if the recent strength continues.

AEM Weekly Chart

AEM Daily Chart

Bristol-Myers (BMY)

www.bms.com

Why the Strength

Bristol-Myers Squibb is a mega-cap pharma outfit, marketing a long list of pharmaceuticals, including Coumadin and Eliquis, to treat cardiovascular, oncology and immune disorders. In January 2019, the company agreed to buy Celgene in a deal with an equity value of $74 billion, which is expected to close at year end and bring along some key treatments cancer and immunological diseases, including Revlimid. As part of the M&A transaction, Amgen will purchase Celgene’s OTEZLA, a psoriasis treatment, for $13.4 billion. That cash influx will be spent quite soon, because Bristol-Myers’ financial priorities include share repurchases, debt repayment and annual dividend increases. In fact, Bristol-Myers just upped their accelerated share repurchase authorization by $2 billion, from $5 billion to $7 billion, which is expected to close when the Celgene merges does. That is certainly helping bring in buyers, as is the heady dividend (2.9% annual yield), but there’s more to it than that—while the Q3 report didn’t wow investors, it did top expectations, and big investors are looking ahead to a buoyant 2020, when analysts see the firm’s bottom line exploding nearly 50%. (Bristol-Myers trades at just 9 times those earnings estimates, compared to 13 for Pfizer and 15 for Merck and at Johnson & Johnson, despite little growth at those outfits.) With what will be $40 billion-plus in revenue, the combined operation won’t grow like the wind, but there are plenty of reasons for the stock to head higher in the months to come.

Technical Analysis

BMY rose to 70 in July 2016, followed by a multi-year series of wild fluctuations and up and (mostly) down. Volume increased dramatically in 2019 upon news of the Celgene acquisition, but it wasn’t until July that shares finally hit bottom. The advance started modestly but gathered steam at the end of September and it’s been straight up since, topping resistance near 53 in the process. We’re OK buying on dips of a point or two.

BMY Weekly Chart

BMY Daily Chart

Garmin (GRMN)

www.garmin.com

Why the Strength

We know that airplanes can fly themselves on autopilot, and now, they can land themselves also—thanks to the Autoland technology from Garmin. Once the FAA issues final approval, we’ll see Garmin technology landing both Cirrus and Piper (small) prop planes, and that’s just one of the cutting-edge technologies that Garmin produces. For the golf enthusiast, the company makes watches that include data from thousands of courses. It makes watches with solar technology and wearable devices that monitor and diagnose heart rates. More than 80% of its business comes from aviation, outdoor, marine, auto and fitness products, and that significant collection of offerings saw sales rise 24% in the third quarter. That was the big reason why Garmin beat analysts’ estimates, posting earnings of $1.27 per share, which was up 27% from a year ago (the second quarter in a row of accelerating growth) and crushed estimates of $0.94. Revenues were expected to be $864 million, but Garmin outperformed there, too, with sales of $934 million! Just as interesting that the recent report was the news surrounding Fitbit, which competes in some wearables category—that company was just snapped up by Google for a cool $2.1 billion, something that could be perceived as hiking competition down the road. But to this point, investors are seeing it as mostly positive (M&A interest in the sector), and combined with its nicely higher guidance following the Q3 report (analysts see earnings up 13% this year and 3% next, but Garmin regularly trashes official estimates), that’s keeping big investors interested.

Technical Analysis

GRMN is one of an increasing number of stocks that’s busting free from long consolidations following their quarterly report. The stock peaked near 90 in April and took seven months off, falling to as low as 74 in July. It did show some strength in August and tightened up beautifully in September and October, and now the buyers are back at it, with shares exploding to new highs after earnings. We’re OK snagging some shares here with a relatively tight stop.

GRMN Weekly Chart

GRMN Daily Chart

Inphi (IPHI)

inphi.com

Why the Strength

Inphi’s has some mind-numbing product names (M200 coherent DSP platform, COLORZ and 200G and 400G PAM4 products), but the big-picture story (it’s the leader in high-speed data interconnects) is easy to understand and should drive accelerating growth in the quarters to come, which is the big reason the stock has resumed its advance. That’s exactly what Q3 and the outlook revealed—revenues (up 21%) and earnings (up 50%) both easily topped estimates, and this came despite weakness surrounding Huawei (due to the ban of sales to that company), where revenues continued to shrink. Instead, the firm’s cloud-related products for connections within and between data centers continued to drive growth (up 3.4% from the prior quarter and up 41% from the year before), and even telecom-related sales rose 7% from a year ago despite Huawei. Even better, management sounded a very confident tone for Q4 (where it has a lot of visibility) and 2020, with the top brass saying that it’s not depending on any new products or industry trends to deliver solid growth. Throw in some exciting happenings from its main customers (one big data center customer said it was going to ramp spending soon), while Microsoft’s massive contract with the Department of Defense will boost demand for Inphi’s interconnect products for data centers. There’s always risk that this technology spending will dry up if the economy really falls apart, but right now, the wind is clearly at Inphi’s back—analysts see earnings up 30% in 2020, which is probably conservative.

Technical Analysis

IPHI’s persistent (13 weeks up in a row) run finally hit resistance in late July in the mid 60s—given that it had just broken free from a two-year-plus base, the odds favored a consolidation followed by a resumption of the uptrend. And that’s what we’re now seeing: IPHI chopped sideways for 10 weeks, but found big-volume support a couple of times during that rest and then, after earnings last week, surged to new highs on its heaviest volume in 20 months. We’re OK starting a position here or on dips.

IPHI Weekly Chart

IPHI Daily Chart

Leggett & Platt, Incorporated (LEG)

leggett.com

Why the Strength

Leggett & Platt doesn’t have a story that will get the blood pumping—the firm is the leading U.S. maker of all sorts of bedding components (foams, private-label compressed mattresses, adjustable beds, etc.), automotive seat supports and lumbar systems, flooring underlayments, home furniture components and more. Growth hasn’t been exciting, either, but recent trends have been encouraging and investors are optimistic that a recovery in all things housing will propel business going forward. As for the here and now, Q3 results easily beat expectations, though a lot of that was driven by acquisitions; the buyout of Elite Comfort Solutions (ECS) brought with it $611 million in annual revenue and gave Leggett a big stake in the specialty foam business. Even so, analysts have hiked their estimates in the wake of the report, and expectations are that even those raised estimates (which admittedly see just single-digit growth next year) are conservative given the trends of the housing market and, importantly, some huge tariffs put in place on Chinese mattresses. (More than 90% of Chinese mattresses are now subject to anti-dumping duties.) Moreover, the valuation (20 times earnings) isn’t huge, debt is being paid down and the company pays a generous dividend (3.1% annual yield) that is raised every year. It’s not sexy, but Leggett fits the profile of a stock that’s attracting buyers in this environment.

Technical Analysis

LEG has been the dog’s dinner for a while now, underperforming for years before finally finding repeated support in the 33 to 36 area from October of last year through August of this year. But during the past few weeks everything has changed—LEG got off its knees two months ago, and after one final pullback in September the stock has gone vertical, with shares exploding to new highs and building on those gains since the report. If you want in, aim for dips.

LEG Weekly Chart

LEG Daily Chart

MasTec, Inc. (MTZ)

www.mastec.com

Why the Strength

MasTec is an infrastructure company, but we’re not talking about roads and bridges here—instead, the firm has its hands in many growth-oriented cookie jars, including oil and gas pipelines and facilities, renewable energy installations, telecom networks and electrical transmission. The stock is strong today for a few reasons. First, business is good: Sales and earnings topped expectations in Q3, backlog is strong in a few areas (record backlog in the renewable power segment) and the large oil and gas segment (46% of revenues so far this year) should have a great 2020 as a big project is actually being pushed into next year due to some delays. Second, though, the best is probably yet to come: Management sees the 5G opportunity as being similar to the energy pipeline buildout from a few years ago; not only are many huge telecoms going to ramp spending on 5G next year, but there should be a good “tail” to demand as these complex and denser networks will require increased maintenance over time. Lastly, the stock is cheap—despite the growth prospects, MasTec trades at just 13 times earnings (and free cash flow is generally higher than reported earnings, too). There is customer concentration risk here (a few customers like AT&T, Energy Transfer, Equitrans and Verizon make up a lot of revenue), but investors are focused on the fact that demand is strong and getting stronger.

Technical Analysis

MTZ broke out of an 18-month consolidation near 54 in July and ran to 66 by mid September before beginning to chop around. It did nose to a new high a couple of weeks ago but then began selling off on large volume, dipping below its 50-day line last Thursday. But now that looks like a shakeout—MTZ catapulted on Friday after earnings and nosed to a new high today. We think it’s buyable around here with a stop near the recent low.

MTZ Weekly Chart

MTZ Daily Chart

MurphyUSA (MUSA)

www.murphyusa.com/

Why the Strength

Murphy USA is a leading marketer of retail motor fuel products and convenience merchandise. The company opened five new retail locations in the third quarter, bringing the total store count to 1,479 Murphy USA and Murphy Express sites, mostly near Wal-Mart locations. Eight new retail locations are opening this quarter, along with the completion of ten kiosk rebuilds, but the big story here revolves around the consumer, who continues to travel and buy gas, cigarettes and groceries on the go, all of which benefits Murphy. The company easily surpassed estimates when it reported last week, with earnings of $2.18 per share, which was a whopping 64 cents above expectations The quarter featured higher store volumes, fuel volumes, tobacco sales and fuel margins that easily offset increased expenses and lower merchandise margins. Operating revenue of $3.66 billion slightly missed the consensus $3.75 billion, but investors didn’t blink. Importantly, the company’s newer stores are outperforming their existing stores, leading management to forecast continued organic growth over the next several years. Throw in a solid share buyback program (share count is down 2.5% from a year ago) and rapidly rising estimates ($5.11 expected in 2020, up from $4.69 expected three months ago) and Murphy looks like yet another cyclical stock that should head higher in this market.

Technical Analysis

MUSA shares put on a five-steps-forward, four-steps-back kind of advance through 2017, but then slipped and, despite numerous rally attempts, couldn’t decisively get above resistance at 90 for any length of time. But that all changed last week when MUSA staged a crazy breakout—the stock exploded 24% on seven times average volume, a very strong earnings gap that portends higher prices. We’re game for nibbling here or on dips and using a loose stop.

MUSA Weekly Chart

MUSA Daily Chart

Qorvo (QRVO)

qorvo.com

Why the Strength

The deployment of 5G and the introduction of cutting-edge smartphones drove superlative results for Qorvo’s second quarter, as its radio-frequency chips (which enable smartphones to communicate with wireless networks) were adopted by its largest customers in their newest communications products. The company benefited from Apple’s production increases, and OEM customers including Huwai and Samsung led the charge in China, with its exponentially increasing sales of smartphones using Qorvo’s chips. (For the 25th quarter in a row, Samsung sold more than 70 million phones, helping to boost QRVO’s results.) Qorvo’s EPS came in at $1.52 per share, handily beating the consensus estimate of $1.30. Revenues also beat, at $806 million, higher than the forecast of $754 million. Earnings and revenues were also aided by the company’s pioneering efforts in and the rapid emergence of the better and faster Wi-Fi 6 technology. As well, gains in QRVO’s defense radar and communications systems and significant opportunities in infrastructure from the faster-than-expected 5G rollout also boosted results. Bigger picture, there’s plenty of potential here--there are now 26.6 billion Internet of Things devices operating in the world, and forecasts say that number will triple by 2025, giving Qorvo significant market opportunities. Wall Street loved the earnings report, and 10 analysts jumped on board with rising estimates. Analysts now expect the company to earn $1.67 per share in the December quarter, with revenues of $850 million, though given last week’s beat and the strength in the sector, those are probably conservative.

Technical Analysis

QRVO has the look of a new leader. The stock was repeatedly rejected by resistance in the 80 to 86 area in 2017 and early 2018 before coming unglued for a while. The recovery in recent months was decent, but nothing special, at least until last week--QRVO’s quarterly report resulted in a buying panic, driving the stock north of the century mark on its heaviest volume in 20 months. Yes, it could retreat, but we’re not expecting a major dip following this surge. You can start small here or on pullbacks of a few points.

QRVO Weekly Chart

QRVO Daily Chart

TopBuild (BLD)

topbuild.com

Why the Strength

It’s a great time to be involved the housing business, as evidenced by the recent quarter from TopBuild, which is the leading provider of insulation and related accessories (both installing and distributing it). No other insulation company comes close, in fact—it’s double the size of its nearest competitor. The company has beat analysts’ earnings estimates in three out of the last four quarters, and TopBuild continued that trend in Q3; earnings of $1.53 per share (up 24%) easily bested estimates of $1.40, thanks to both solid sales (up 5% and a notch above expectations) and rising profitability (its EBITDA margin, which is a measure of cash flow, rose from 13.0% to 14.4% in the quarter). The strong housing market was obviously a primary factor, but the company isn’t shy about pulling the M&A lever to help drive growth and cement its industry leadership—last quarter, the firm completed its purchase of Viking Insulation, and TopBuild CEO Jerry Volas noted that the company is “evaluating a robust pipeline of acquisition candidates.” Not surprisingly, estimates have trickled higher in the wake of the report and the future continues to look bright for the housing sector after a rough 18 months; in September, building permits were up 7.7% over last year, while housing starts rose 1.6%, to 1,256,000. TopBuild’s announcement of an additional $50 million in share repurchases is another positive.

Technical Analysis

After struggling in the latter half of 2018, BLD rocketed right back to its all-time highs by mid May of this year before taking three-month breather. The stock decisively broke out to virgin turf in early August, and while the advance from there wasn’t jaw-dropping, BLD made steady progress with repeated support near its 50-day line. The two-day romp after last week’s report is good to see, though we’d probably favor entering on modest weakness.

BLD Weekly Chart

BLD Daily Chart

TransDigm (TDG)

www.transdigm.com

Why the Strength

TransDigm Group is a leading maker of highly-engineered aircraft components for use on nearly all commercial and military aircraft in service today. The company is profiting from a strong economy that’s supporting passenger air travel as well as higher government defense spending. TransDigm’s March 2019 acquisition of Esterline Technologies is already exceeding management’s profit margin goal, with more upside expected as TransDigm sheds two of the underperforming Esterline businesses this year. The stock has been a long-term winner thanks to steady growth (much of their business is aftermarket, which effectively produces recurring revenue for decades) and reliability that’s hard to beat (it’s the sole source for 80% of the parts it supplies!), and that has continued this year—revenue growth has been artificially high due to the Esterline buyout (organic revenue growth in Q2 was a solid 12%, which is about what can be expected going forward), but earnings topped expectations in the August report and management hiked guidance. The real key is will come on November 19, when the company will report Q3 results—analysts are looking for $5.17 per share of earnings (up 38% from a year ago) and $1.6 billion of revenue. We make no predictions, but there’s little doubt TransDigm’s business is strong.

Technical Analysis

TDG broke out to new highs following earnings in January, and while it hasn’t grabbed the headlines it’s performed solidly since—the stock rested for most of May, June and July, gapped up in August and has again consolidated, this time in the 500 to 550 area (give or take) for three months. If you’re aggressive, you can nibble ahead of the report and look to average up should TDG breakout following earnings.

TDG Weekly Chart

TDG Daily Chart

Previously Recommended Stocks

Below you’ll find Cabot Top Ten Trader recommended stocks. Those rated HOLD are stocks that traded within our suggested buy range within two weeks of appearing in the Top Ten and still look good; hold if you own them. Stocks rated WAIT have yet to dip into our suggested buy range … but can be bought if they do so within the next week.

Those stocks rated SELL should be sold if you own them; they will no longer be listed here. Finally, Stocks in the DROPPED category are those that failed to trade within our buy range within two weeks of our recommendation; that’s not a bad thing, we just never got the price we wanted. Please use this list to keep up with our latest thinking, and don’t hesitate to call or email us with any questions you may have. New recommendations each week are in green.